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Friday, October 30, 2020

Q1 results reveal how covid-proof FMCG companies are

  • The pandemic has added complexity to their operations, with these companies strongly relying on how covid-proof their product portfolios and supply chains were
  • Companies have indicated that rural markets have performed better

The coronavirus pandemic struck at a time when India’s fast-moving consumer goods (FMCG) firms were already grappling with a slowdown in consumer demand.

The pandemic has added complexity to their operations, with these companies strongly relying on how covid-proof their product portfolios and supply chains were.

While it was an uphill journey for most FMCG firms, some such as Britannia Industries and Tata Consumer Products have gained because of an increase in the consumption of food at home. Some dished out new product lines by the dozen to tap into new opportunities such as sanitizers, although the verdict on this strategy is still out.

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Industry leader Hindustan Unilever (HUL) said around 80% of its portfolio, comprising health, hygiene and nutrition products, expanded 6% in the June quarter. But the remaining 20% of its portfolio, including skincare, colour cosmetics, ice cream and food solutions products fared miserably. Overall, HUL’s domestic consumer growth declined by 7%, after adjusting for the impact of the GlaxoSmithKline Consumer Healthcare merger.

“For HUL, the gains from a shift from the unorganized category are limited compared to some other firms, say, Britannia Industries, which benefited from the shutdown of local bakeries during the lockdown. Simply put, HUL’s portfolio isn’t as ‘covid-friendly,’ owing to the discretionary nature of some of its products. Moreover, given its large size, the contribution from new launches during the June quarter was much smaller vis-à-vis other companies,” said Varun Lohchab, Head of institutional research at HDFC Securities.

Britannia capitalized on the rising in-home consumption effectively, extracting a neat 26.7% year-on-year growth in consolidated revenue. Similarly, Tata Consumer Products saw a 13% revenue growth, helped by increased in-home consumption. ITC’s food segment also performed well. However, Nestle India’s domestic revenue growth for the June quarter slowed to 2.6%, compared to 10% each in the previous three quarters.

Commenting on Nestle’s relative underperformance in the food category, analysts at Kotak Institutional Equities said, “We note that other FMCG companies smartly leveraged third party distribution (including startups), rationalized SKUs (stock-keeping units) to drive cost savings, and cut down on trade incentives/promotions (aided gross margins).”

The broking firm said Nestle was also affected by its higher urban salience. Nestle said it was hurt by production disruptions across factories and sharply lower demand in the out-of-home channel.

Colgate Palmolive India’s revenue drop was contained at 4% as the oral care category remained unaffected by covid. Marico’s revenues fell 11% as India business was weaker. Godrej Consumer Products’ (GCPL) consolidated revenue was flattish as India and Indonesia fared well but Africa lagged. Its domestic household insecticides segment outshined but soaps and hair colours were subdued. Dabur India’s healthcare portfolio did well even as foods suffered due to lower demand for cold beverages.

Companies have indicated that rural markets have performed better. “Given the lower spread of the virus and tailwinds from good monsoon/ government spending, rural and smaller towns led recovery, even as large cities lagged,” said analysts at Jefferies India in a report on August 10.

Firms launched new products suited to the pandemic across food, hygiene and health categories. Dabur had more than 50 launches in the past few months. New product contribution improved to 6% of Dabur’s June quarter revenues. GCPL had about 45 launches.

True, launches help tap into new opportunities, but investors would probably be better off keeping expectations low. “These are (likely) primary sales (firm selling to distributors) and consumer acceptance is still untested somewhat,” wrote ICICI Securities’ analysts in a report on August 6. “We have a concern on the bunching up and timing of these launches as retailers are not ready to stock new products (per market checks) and consumer is hesitant to try new products along with fewer opportunities for consumers to browse and buy.”

Meanwhile, investors have taken things too far in rewarding the covid winners. Shares of Tata Consumer touched a new 52-week high on NSE on Friday. The Britannia stock is about 20% higher than its pre-covid highs in February. Overall, the Nifty FMCG index has gained 4.9% so far in 2020, compared to a 6.5% drop in the Nifty 50 index.

The high valuations of most consumer firms may well find support in these uncertain times even if the road ahead is rocky, an analyst said seeking anonymity.

“Overall, for the FMCG sector, sporadic lockdowns in some areas in July may have hit the recovery rate in the current (September) quarter. Consumers are still cautious about spending on non-necessities and demand for out-of-home will remain under pressure in FY21,” added Lohchab.

Although it is encouraging that some discretionary demand appears to be recovering. “Firms pointed to a sequential recovery in skincare, haircare, etc., toward the latter part of June quarter,” said Jefferies’ analysts.

SourceLive Mint
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